Boomers Next New Market

March 29, 2011

Boomers Next New Market

Dear Client:

Is it such a stretch to think Millennials might share some beer with their elders? If (big if) craft can tap Boomers, the gains are clear. Ex MillerCoors marketing insights guy Mike Kallenberger painted a picture at CBC: 76 million Boomers drink beer at least once a week. If each decided to drink just one more craft beer per week, it would result in an extra 3 million barrels per year, which is of course larger than Boston Beer Co.

But you can’t teach an old dog new tricks, right? Not according to behavioral economics, which says that people change habits when their lives shift. Boomers (b. 1943-1960) are open to influence because of changes going on in their lives – i.e., empty nests and retirement. (But this largely still employed and entrepreneurial group has spending power.)

Mike suggests tapping resonant themes to reach the group. They drink wine because it’s perceived as healthy. They spend more time with women. Their emphasis on “self-actualization” resonates with “innocent,” “explorer” and “sage” archetypes – which Kallenberger thinks are already well captured in some craft imagery. For example, Fat Tire, Sierra Nevada and Sam Adams all capture themes of purity and renewal, a return to soil and rejection of materialism, which resonate with the “innocence” theme.

So maybe it’s mumbo jumbo. Mike claims non-traditional research and insights helped turn around Miller Lite in 2002. So….

CRAFT TO BREAK ON THROUGH OR DIE

Beer Marketer’s Insights chief Benj Steinman presented some numbers in his “Break on Through” session. His thesis invoked Joseph Schumpeter’s “Creative Destruction,” which captures the essence of capitalism: “Something new kills something older.” He’s talking about craft.

Bold statement. Here’s the starting point for the case: The overall industry decline over the last two years is more than half the size of craft – 6 million barrels. Yet a handful of craft breweries have announced big capacity expansions (note Lagunitas). Etc.:

VIEW AT THE TOP. The top 10 craft companies were all up last year; four were up double digits. The fastest grower of them all is the new entrant: Bell’s, at 23% growth. After that, the “100,000 barrel club” is 20 members strong; 7 of them joined in 2010. This group, which includes Goose Island, Alaskan, Stone, Abita, Brooklyn, Lagunitas, and more (with Summit, New Glarus and Sweetwater right behind) grew faster than the first group, with 4 of them up 20%.

TOP MARKETS. Craft is “flying high” in the top markets of Portland, Seattle, Los Angeles, San Francisco and Milwaukee, the fastest growing market among major metro areas, to equal 10.2% dollar share, a 0.8+ change. Midwest and Southern markets are also up. There is double digit growth in each of the top four markets; urban coastal is big.

REGIONAL MICROCOSMS. Benj explored a few key markets – Oregon, New Hampshire, and Missouri – to demonstrate regional trends. Though in different areas of the country, each state has a handful of mostly local or regional players that dominate. All three markets have experienced consistent double-digit growth. Here we go: Oregon gained 2.7 share overall to 14.6, despite a market down 7%. Its top five brands (Redhook, Widmer, Deschutes, Full Sail and MacTarnahan’s) do 2/3 of in-state craft business, but have recently lost share. Interestingly, across the way, in A-B’s backyard, Missouri has a less-developed but growing craft market. It’s just under 4 share but up 15%. Local guys Boulevard and Schlafly are half of that market.

BOSTON BEER CONSPIRACY. Some of you may realize that Boston’s “BHAG” (Big hairy audacious goal) is 6 million barrels. They made $80 mill in operating income last year, and according to Benj, “do build the craft category beyond a shadow of a doubt.” But are they “preparing for a craft Armageddon?” he asks. They have the freshest-beer-in-market initiative and are becoming more aggressive in price. This could be about “blowing craft bigger,” he says.

CHALLENGES. Pricing. It’s the curveball of craft value. In Oregon, for example, 9 of 10 top craft brewers were selling beer for lower in 2010 than a year earlier. Mark Hegedus of Deschutes then explained from the audience that retailers are choosing to make less margin on craft. A challenge is then to get them to not view craft as “a lost leader.”

Some extra spice to that stat: Of course, more low-priced craft brands could pop out of A-B or MillerCoors, but could they also come from a craft brewer with excess capacity who wanted to fill a plant?

NICK TELLS YOU FROM WHENCE YOUR VOLUME COMES

Nielsen numbers guru Nick Lake presented some interesting off-premise intel at Saturday’s CBC session. Big surprise: Whether consumers can tell or not, independent, BA-defined crafts are growing the fastest in the industry, though “affiliate” brands like Blue Moon, CBA et al. are picking up speed too.

BA-DEFINED VS. AFFILIATE CRAFT BRAND GROWTH. Craft is up almost 17% on a dollar basis, 15% on a case basis. The “BA group” in Nielsen’s data represents over 70% of craft volume; alliance, 30%, per Nick.

But here’s the big story: What’s driving it? Velocity. That’s a good message for the retailer, as more brands are selling faster than the category. Volumes sold on features are up, too – 17% for BA brands, 15% for affiliates. “The message to retailers is that they get significant value by putting your brands on ad,” Nick says.

VOLUME DRIVERS/SOURCES. Nearly 70% of growth in category is coming from seasonals, variety packs and hoppy styles. Nick also cited “pockets of growth” in coffee flavored beers, Belgians, barrel-ageds, variety packs, stouts and pale ales.

Further, craft beer drives trade-up and is sourcing volume from all beverage segments. 59% of craft gain is shifting from other bev-alc segments; 30% comes from current drinkers drinking more; 11% comes from new craft drinkers. If that latter trend continues forward, that last group should drink more next year. More good stories for retailers.

CHALLENGES. “But watch out,” Nick says. Emphasizing styles to retailers could result in something like a seasonal, variety pack and Belgian section – the dreaded “winification of beer” (you’ll start hearing that more), where all we’re competing on is price. Other challenges include, of course, retail saturation. The average supermarket stocks about 200 SKUs of beer, 25% craft. It’s important that we start thinking about the purpose of brands and the roles they play in the retailers’ mix, Nick says. Also, the emerging demographics of future LDA growth doesn’t currently jive with craft’s sweet spot, including multicultural and lower income.

DESCHUTES ROLLS INTO MORE MARKETS BY E.O. 2011

The Oregon-based maker of Black Butte and Mirror Pond will likely roll into Missouri, Eastern Kansas, Wisconsin and possibly even South Dakota by the end of the year, now that they’re ramping up production.

Marketing chief Mark Hegedus says the company had been a little concerned about keeping up with the California market, but they’re up 30% YTD with 2,250 new SKU placements.

SAINT ARNOLD’S FINANCING: A TALE

When Saint Arnold Brewing Co. in Houston set out to secure bank financing for brewery expansion, bankers told them they needed to bring 10 percent, or $500,000, to the table. CEO Brock Wagner told them he would have it committed in private equity in two weeks. The bankers laughed. In two weeks, they had $1.5 million in promised money from consumers and had to start telling people no, Brock told attendees at Brewers Association Craft Brewers Conference in San Francisco on Friday.

That private equity deal eventually secured $5.1 million in debt financing including $2.8 million from a bank note at 6.28 percent interest. The other $2.3 million chunk comes from a SBA debenture for 20 years at a steal of a deal 3.17 percent interest. “Yes, I will not be paying that off early,” Brock said.

Brock told brewery owners looking to expand and startups that a private offering can be a hard sell in some industries, but is very doable in the beer world. His points: beer and breweries have a unique appeal, the craft segment is growing (up 11 percent by volume in 2010) and customer loyalty extreme enough to invest in the beer they drink gets the attention of bankers to land the rest of the money.

Public success stories also don’t hurt. “Thank you Boston Beer Co.,” Brock said of a publicly traded stock that rose from $20 at offering to more than $90 last week. Borrowing from BBC’s own public documents filed with the SEC, Brock laid out a blueprint for determining the market value for the private stock including multiples for revenue, EBIT, EBITD and net income.

Saint Arnold’s offering price included a liquidity discount of 25 percent, a figure that is lower the more liquid the assets are. Brock said he could have no discount on his private offering and still sold, “but these were our customers we’re selling to and I did not want to screw our customers.”

Although Brock said his only exit strategy from Saint Arnold is death, he has promised the investors that he would make a market for the equity, but there are no sellers at this point. “At some point we would like to start paying dividends.”

In all, the strategy kept the company from having to seek other times of investments that come with more risk on the control side and allow Saint Arnold drinkers to feel more a part of the brewery. “Be very careful about venture capital,” Brock cautioned the brewery owners and startups. “I’m not sure it’s a good fit for our industry.”

FLYING DOG SUES MICHIGAN OVER RAGING BITCH BEER

Flying Dog Brewery filed suit in U.S. District Court on Friday to overturn the Michigan Liquor Control Commission’s ban on the sale of the company’s best-seller, Raging Bitch. The suit also seeks to recover damages from the loss of Flying Dog sales under the statewide ban, which the Commission issued based on its members’ personal distaste for Raging Bitch’s labeling. According to Jim Caruso, no other state or country in the brewer’s 20+-nation network has rejected the brew.

“We had Raging Bitch in Michigan when we mistakenly thought it was approved,” says Jim. “Then we had to pull it. Consumers loved everything about it.”

The brouhaha began In September 2009. The Michigan Liquor Control Commission barred the sale of Raging Bitch, claiming that the beer’s label — designed by renowned British artist Ralph Steadman — is “detrimental to the public health, safety and welfare.” It depicts a dog in psychedelic Steadman style.

BREWPIC. Arrogant Crabsters: The Stone Brewing crew chows down on some seafood at the CBC.

Until Monday, Jenn

“The trouble with retirement is that you never get a day off.”
-Abe Lemons

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